Sub-strategy: “averaging down”

Before I write a blog post on my main strategy in investing in equities, I shall first talk about a useful and seemingly simple “sub-strategy” which I had adopted: “averaging down”. “Averaging down” involves investing additional amounts in a financial instrument or asset if it declines significantly in price after the original investment is made.

The main advantage of averaging down is that an investor can bring down the average cost of a stock holding quite substantially. Assuming the stock turns around, this ensures a lower break-even price for the stock position and higher gains as compared to the situation in which the price of the stock was not averaged down.

From my own example, I had purchased Singtel at a price of $3.86 in July 2017 which was too high of a price to pay for Singtel. However, the price of Singtel plummeted to $2.96 in March 2019 due to the release of poor financial results. This was a good opportunity for me to purchase Singtel to “average down” the price of Singtel stocks I owned. However, it is important to note that there are some caveats to employing the “averaging down strategy”.

Averaging down should be done on a selective basis for specific stocks, rather than for every stock in a portfolio. This strategy is best restricted to high-quality blue-chip stocks. Such stocks have a positive long-term track record, strong competitive position, very low or no debt, stable business, and sound management

Before averaging down a position, the company’s fundamentals should be thoroughly assessed. The investor should ascertain that a significant decline in a stock is not a symptom of a deep-rooted problem. Minimally, factors that need to be assessed are the company’s competitive position, long-term earnings outlook and business stability. This leads me to my upcoming blog post on my adopted strategy with regard to investing in stocks. Stay tuned for it!

Beginning of my investment journey in stocks

Mindset

In 2017, as my savings increased from a 3-digit sum to a 4-digit sum with the excess from my National Service allowance, I was not contented to let it lay inactive in my POSB Save-As-You-Earn account even though the interest rate was a relatively attractive 2% per annum. Hence, I decided to embark on my investment journey.

With my limited financial knowledge, the beginning of my investment journey was truly challenging. The economy was booming in 2017 and it seemed like it was the best time to start investing. Armed with the savings from my NS allowance, I decided to take the plunge and opened an account with DBS Vickers. Investing in unit trusts or saving bonds or even exchange-traded funds were out of the question for me as I wanted to actively monitor my investments and gain experience from my initial investments. My strategy then was simple but essentially non-existent: all that I intended to do was to purchase blue-chip stocks which were given “buy” recommendations from different sources such as investment analysts as well as investment blogs.

Even though I understood the terms used in the reviews and recommendations from my basic economics knowledge, my limited financial knowledge meant that I did not appreciate the underlying assumptions made in the recommendations. I was unable to conduct my own analysis as well. However, I thought that investing in blue-chip stocks will be almost risk-free and suitable for a beginner like me.

First stock: Raffles Medical

The first stock that I decided to buy in July was Raffles Medical for a few reasons:

  1. It was a blue-chip stock
  2. It was in the healthcare industry which I thought had great potential for growth considering the increasing reliance on healthcare

It turned out to be a really poor investment. I purchased it at $1.38 in June 2017. Its price now is only about $1.03. However, the silver lining in the dark cloud is that the company’s fundamentals are still strong.

Second stock: Singtel

The first stock that I decided to buy in July was Singtel for a few reasons:

  1. It was a blue-chip stock
  2. It paid attractive dividends (~5.4%)
  3. Analysts were confident of its prospects
  4. Everyone of all ages seemed to be holding on to Singtel stocks.

At that time, Singtel’s price was $3.86 and it did not occur to me that it might have been too expensive. Hence, I decided to buy Singtel stocks. It turned out to be an unwise decision as the price plummeted to $2.90 in 2018 before recovering to a current price of about $3.20. Similar to Raffles Medical, the company’s fundamentals are still strong.

Lessons learnt:

1. It is important to invest with a strategy in mind. 

Investing without a clear and well-thought out strategy is akin to gambling.

2. Both fundamental and technical analysis of stocks is important.

My mistake was to completely neglect the technical aspect of investing and merely focus on the fundamental analysis. This was not practical, especially given the poor knowledge I had of a company’s financials at that time. Moreover, purely relying on fundamental analysis will not be effective in the short to mid term.